Russia - Who to Believe?
By Steve Wallage, Wed Oct 29 14:00:00 GMT 2003

Emerging markets will drive mobile growth - but there are wildly different views on the numbers.

Emerging countries will clearly drive future mobile growth. Jorma Ollila, chairman and CEO of Nokia, stated in a presentation in Moscow in August 2003, that over 80% of mobile subscriber growth will come from new markets in the next 5 years.

Russia is clearly one of those markets. It has a population of around 150 million, and despite subscriber growth of over 120% in 2002, and expected subscriber growth of nearly 100% in 2003, the subscriber base at the end of September was only 31 million. This growth was at the expense of ARPU that fell by around a third in 2002 to $22, and over 80% of subscribers are now pre-paid.

But how quickly will subscribers and revenues grow?

Subscriber and ARPU

Yankee Group, in a note published only in June, predict just 37 million subscribers by the end of 2007. One of the main reasons for their pessimism is that around 40 million people live in areas like Siberia and the Ural - unattractive for operators as sparsely populated and low income. Yet, recent strong growth in Russia - two million gross additions in September alone - has already made these figures look as accurate as the analyst projections for Western Europe in the 1990s.

Nokia's figures suggest at least 60 million subscribers by 2008. Pyramid Research put the figure at 68 million in 2007, while J'son & Partners - a local consultancy - put the figure at 82 million by the end of 2008.

According to the September Cellular Market Watch of J'son & Partners and Sotovik, we have already reached penetration rates of 62% in the greater Moscow area. They believe that this figure will go over 80% by 2008, and the Far East of Russia will see much lower penetration, but above 30%.

The optimism of J'son & Partners is reversed in ARPU projections. Yankee Group foresees it falling to $17 before recovering to reach $19.60 in 2007. J'son & Partners see it hitting $10 and barely rising in 2007-2008. The difference may be partly explained by the much higher subscriber numbers predicted by J'son & Partners. However, the fundamental difference is due to forecasts on the core voice revenues - in fact, J'son & Partners see a much higher proportion of the revenue (25% compared to 14% from Yankee Group) coming from value-added services.

The "Big Three" Operators

The Russian market is extremely complex as it is segmented into 89 regions. Mass consolidation has created a 'big three' of MTS (25.1% owned by T-Mobile), Vimpelcom and Megafon (43.8% owned by TeliaSonera). According to the September Cellular Market Watch, they had a combined 85% of the market.

While Yankee Group foresees further consolidation efforts by the big three, J'son & Partners foresees this will stop as they already have the coverage they desire. Instead, J'son & Partners believes we may yet see Svyazinvest become a fourth national operator. Although the official position of the Ministry is that there should be just three national operators, Svyazinvest has stakes in more than 60 cellular operators.

Within the next 18 months, the competitive position will become far clearer, and it is at this point that other Western operators may look again at investing in Russia.

Next-G Mobile

Pyramid Research believes that cdma2000 will lead the charge, and there will be over one million users by 2008. J'son & Partners see a similar figure, but forecast that UMTS licenses will be awarded in 2004 and that there will be around 1.5 million UMTS subscribers by 2010.

On the mobile content side, C & Partners believe that the number and ambition of local companies has been widely under-estimated. They forecast more than 3,000 content providers and $760 million in content revenue by 2007.

Handsets Pie

Although there are no local manufacturers, it is a highly competitive market. J'son & Partners estimate that, for the first half of 2003, Nokia had 24%, Motorola 19%, Siemens 17% and Samsung 16%. The 'gray' market is estimated to be around 20-30% of the total market. Chinese vendors have also highlighted Russia as a possible export market for their low price models. Operators are also looking to cut subscriber acquisition costs.

However, the good news for vendors is that sales are still dominated by new subscribers rather than replacements. New services such as MMS (already available) will also drive the replacement market.

Summing Up

The growth rate and opportunity in Russia is reminiscent of Western European markets five years ago, and Russia has the population of the UK and Germany combined. However, the comparisons should not be taken too far given the wide variations across Russia, the complex competitive situation, and the advanced state of the market in some areas. Vendors and operators need to be very careful in assessing the market, and ensure they know exactly who to believe.